Loss of Britain's prized AAA credit rating weakens sterling

Moody's downgrade of Britain's credit rating has seen sterling take a hit on the markets

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Britain's loss of its prized AAA credit rating intensified the pressure on sterling, despite another rally for London's top flight shares index.

The currency weakened during overnight trading in Asia, leaving it at a 31-month low against the US dollar and at a 16-month low against the resurgent euro.

But much of the reaction to the Moody's downgrade had been priced into markets following a run of recent poor economic updates.

In contrast, the FTSE 100 Index was unmoved by the economic gloom as a large proportion of its earnings comes from overseas, triggering potential benefits from the weakness of the sterling.

The FTSE 100 Index opened around 40 points higher at 6375, while the pound was at 1.51 against the US dollar and 1.14 versus the euro during a steady start to European trading.

ETX Capital market strategist Ishaq Siddiqi said: "Most in the markets see the downgrade as a symbolic move that will likely heat up the political discussions over the UK's damp economic growth prospects and spur the coalition Government to launch bolder policies to drive growth."

Ministers and senior party figures have rallied round Chancellor George Osborne in the wake of the decision by agency Moody's, predicting it will have little impact on the Government's borrowing costs.

Tory backbenchers also upped calls for tax and spending cuts to kick-start growth, warning that next month's Budget is the "last chance saloon". But Labour reiterated its calls for borrowing to be increased in the short term to fund a fiscal stimulus.

Speaking on the BBC's Andrew Marr Show on Sunday, Business Secretary Vince Cable dismissed the downgrade as "largely symbolic". He said: "In terms of the real economy there is no reason why the downgrade should have any impact. If you remember last year the US was downgraded, the economy grew strongly relative to Europe... and France had a downgrade last year, its interest rates that it borrows long term in the markets are only a little above ours.

"These things do not necessarily affect the real economy but they reflect the fact that we are going through a very difficult time and we are trying to balance the need to get the deficit and the budget under control with the need to get back to economic growth."